INDIAN TWO-WHEELER INDUSTRY

Volume growth decelerates in Q3, 2011-12; slower growth expected in Q4, 2011-12 as well
ICRA RATING FEATURE FEBRUARY 2012

Overview The Indian two-wheeler (2W) industry recorded sales volumes of 3.4 million units in Q3, 2011-121, a growth of 11.0% (YoY) but flat (QoQ). Although the YoY volume growth of the industry remained in double digits, the pace of growth during the last quarter was at its lowest gear in the last three years. The deceleration in growth was contributed mainly by the motorcycles segment which grew at a much lower rate of 9.2% (YoY) in Q3, 2011-12; even as the scooters segment continued to post 20%+ (YoY) expansion. Overall, ICRA expects the domestic 2W industry to report a volume growth of ~13% in 2011-12 as we expect growth to fade further in Q4, 2011-122 due to base effect.
In an environment where the northward movement of inflation, fuel prices and interest rates has been the nemesis of the Indian automobile industry at large, the 2W industry has been the most resilient reflected in its healthy volume growth of 15.0% (YoY) in 9m, 2011-12. The growth has been supported by various structural positives associated with the domestic 2W industry including favourable demographic profile, moderate 2W penetration levels (in relation to several other emerging markets), under developed public transport system, growing urbanization and expected strong replacement demand, besides moderate share of financed purchases. ICRA expects these strengths, coupled with the OEMs thrust on exports, to aid the 2W industry to report a volume CAGR of 10-12% over the medium term to reach a size of 21-23 million units (domestic + exports) by 2015-16. Table 1: Trend in Sales Volumes of the Indian 2W Industry (Source: SIAM)
Volumes (Units, Nos.)
Domestic 2009-10 2010-11 Q1 2011-12 Q2 2011-12 Q3 2011-12 2009-10 2010-11

Corporate Ratings
Anjan Deb Ghosh +91 22 3047 0006 anjan@icraindia.com Analyst Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia.com Jitin Makkar +91 124 4545 368 jitinm@icraindia.com

YoY Growth (%)

Q1 2011-12 Q2 2011-12 Q3 2011-12

Motorcycles Scooters Mopeds Total Domestic

Exports

7,341,122 1,462,534 564,584 9,368,240

2009-10

9,019,090 2,073,797 697,418 11,790,305

2010-11

2,464,143 532,867 190,672 3,187,682

Q1 2011-12

2,558,515 650,155 192,859 3,401,529

Q2 2011-12

2,556,782 659,643 186,472 3,402,897

Q3 2011-12

25.9% 27.4% 30.9% 26.0%

2009-10

22.9% 41.8% 23.5% 25.8%

2010-11

17.5% 13.3% 21.0% 17.0%

Q1 2011-12

15.4% 29.0% 7.0% 17.3%

Q2 2011-12

9.2% 21.6% 2.6% 11.0%

Q3 2011-12

Motorcycles Scooters Mopeds Total Exports

1,102,978 30,125 6,905 1,140,008

1,480,983 52,312 6,295 1,539,590

482,566 20,949 1,461 504,976

492,408 24,696 3,478 520,582

448,090 23,950 2,796 474,836

13.6% 16.7% -5.4% 13.5%

34.3% 73.6% -8.8% 35.0%

27.1% 100.4% -44.0% 28.6%

31.7% 88.5% 159.2% 34.0%

21.8% 92.0% 188.0% 24.5%

1 2

Refers to domestic sales volumes The domestic 2W industry grew by 14.8% (YoY) in 10m, 2011-12

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TREND IN QUARTERLY SALES VOLUMES AND MARKET SHARE IN MOTORCYCLES

Chart 1: Trend in Quarterly Sales Volumes of Motorcycles (Domestic)
3.0 35% 30% 25%

2.5

million units (Nos.)

2.0

Sales Volumes Analysis - Motorcycles The domestic motorcycles segment recorded a volume growth of 9.2% YoY in Q3, 2011-12 and as has been the trend over the last several quarters, the >125cc segment of motorcycles grew much faster than the 75-125cc segment. With this, the contribution of the >125 cc segment to the total motorcycles segment increased from 26% in 2009-10 to 29% in 9m, 201112. Market Share Trends The Indian motorcycles segment continues to be dominated by Hero MotoCorp which has maintained its market share at over 55% in the domestic motorcycles segment over the last five quarters (Refer Chart 2). The top three players accounted for 89.5% of the industrys volumes in Q3, 2011-12 (92.0% in 2007-08), with Honda Motorcycles reclaiming its spot as the third largest player, a position which it had lost out to TVS in the previous quarter after having retained it since Q4, 2009-10. In the 75-125cc segment of motorcycles (that represented 71% of total motorcycles sales volumes in 9m, 2011-12), Hero MotoCorp continues to be a strong market leader with a share of 74.2% in 9m, 2011-12 (70.4% in 9m, 2010-11). In the >125cc segment of motorcycles, while Bajaj Auto continues to account for nearly half the segments volumes (49.1% in 9m, 2011-12), Yamaha has been the fastest growing having improved its market share from 8.1% in 9m, 2010-11 to 10.1% in 9m, 2011-12. Short to Medium Term Outlook ICRA expects the entry segment (bikes having price less than Rs. 40,000) volumes in the domestic market to grow at a much slower pace than the overall 2W industry and volume growth in this segment to be driven mainly by exports. This is because the segment is no longer a key focus area of OEMs due to limited scope for margin expansion and high interest rate sensitivity. While the executive segment (bikes in the Rs. 40,000-50,000 price range) is expected to maintain its steady growth, competition is likely to intensify following aggressive model refurbishment and new model launch plans of most OEMs. The premium segment (bikes having price greater than Rs. 50,000) is expected to remain the fastest growing over the medium term, given the strong growth in purchasing power in the hands of middle-class urbanites, especially in the age group of 20-30 years. This should also translate into superior profit margins for players that are stronger in the premium segment.

20% 15% 10% 5%

1.5

1.0

0.5

0% -5% Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12 Motorcycles Volumes Growth (QoQ) Growth (YoY)

Source: SIAM, ICRAs Estimates

Chart 2: Trend in Market Share in Motorcycles Segment (Domestic)

100% 3.6% 8.2% 7.3% 27.0% 4.2% 7.3% 7.1% 4.9% 7.1% 6.9% 25.6% 4.4% 6.8% 6.8% 26.1% 4.6% 7.3% 6.3% 25.3% 4.9% 4.9%

90%
80% 70% 60% 50% 40% 30% 20% 10% 0%

6.5% 6.8%
26.8%

8.1% 5.6%
25.1%

28.5%

54.0%

52.9%

55.5%

55.9%

56.5%

55.0%

56.2%

Q1, 2010-11

Q2, 2010-11

Q3, 2010-11

Q4, 2010-11

Q1, 2011-12

Q2, 2011-12

Q3, 2011-12

Hero MotoCorp

Bajaj Auto

TVS

Honda Motorcycles

Others

Source: SIAM, ICRAs Estimates

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TREND IN QUARTERLY SALES VOLUMES AND MARKET SHARE IN SCOOTERS

Chart 3: Trend in Quarterly Sales Volumes of Scooters (Domestic)
0.7 0.6 0.5 60% 50% 40% 30% 20% 10% 0% -10% Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12 Scooters Volumes Growth (QoQ) Growth (YoY)

0.4 0.3 0.2 0.1 -

Source: SIAM, ICRAs Estimates

Chart 4: Trend in Market Share in Scooters Segment (Domestic)

100% 90% 80% 15.3% 70% 60% 50% 40% 30% 48.3% 20% 10% 0%
Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12

5.8% 11.1%

8.7%
9.9%

8.7% 11.3%

7.3% 12.1%

6.1% 12.7%

6.5% 10.4% 15.0%

4.9% 9.1% 15.9%

15.4%

16.7%

18.4%

18.4%

19.6%

23.6%

22.8%

19.4%

21.9%

21.2%

20.5%

42.4%

41.3%

41.0%

42.4%

45.4%

50.7%

Honda Motorcycles

TVS

Hero MotoCorp

Suzuki

Mahindra

Sales Volumes Analysis - Scooters Segment-Wise Analysis Barring Q1, 2011-12, the growth in scooter volumes has The strong double-digit volume growthsegments recorded sales by the motorcycles generally outperformed that of(Refer the motorcycles segment, partly due to the segment in Q1, 2011-12 Chart 1) was not consistent across all formers smaller base . In Q3, 2011-12 too, the sales volumes of the segments - Entry, Executive and Premium. The volume growth was a domestic scooters segment at ~660,000 units recorded a growth of 21.6% blend of: (YoY), higher than the 9.2% growth in motorcycle sales. With this, the share The flattish growth (~3%) of the entry segment (bikes having price of the scooters in the total domestic two-wheeler less than segment Rs. 40,000 ) which accounts for around 16% of volumes the total increased to 19.4% in Q3, 2011-12 from 17.6% in 2010-11. domestic motorcycles sales volumes The steady growth (~17%)of the executive segment (bikes in the Rs. Market Share Trends price range) which accounts for around 65% of the 40,000-50,000 Overall, Honda Motorcycles continues to maintain total domestic motorcycles sales volumes its leadership position in the scooters through its flagship brand Activa (besides The segment fast growing (~30%) premium segment (bikes Aviator having and price Dio) enjoying a market share of 50.7% in Q3, 2011-12. While capacity greater than Rs. 50,000) which accounts for around 19% of total shortfall domestic at the companys plant at volumes Manesar (Haryana) had restricted its motorcycles sales volume growth in the recent past, the company began commercial production at its new plant at Tapukara (Rajasthan) in July 2011. This has Short to Medium term Outlook allowed the company tosegment consolidate its market position over theto last two ICRA expects the entry volumes in the domestic market grow at quarters . However, Hero MotoCorps demonstrated success in improving a much slower pace than the overall 2W industry and volume growth to be market (through its sole Pleasure ) coupled new scooter driven share mainly by exports. Thisbrand is because the segment with is not a key focus models proposed to be launched by Hero MotoCorp, TVS and Yamaha over area of OEMs due to limited scope for margin expansion and high interestthe short to medium could shrinkage of market share to gap between rate sensitivity. While the imply executive segment is expected maintain its the market leader and others over time. steady growth, competition is likely to intensify following aggressive existing model refurbishment and new model launch plans of most OEMs. Short to Medium Term is Outlook The premium segment expected to remain the fastest growing over the ICRA expects the scooters segment to gradually increase its share in thein medium term, given the disproportionate growth in purchasing power domestic 2W market from 17.6% in 2010-11 to ~21% by 2014-15. With this, the hands of middle-class urbanites, especially in the age group of 20-30 the domestic scooters market is estimated to nearly double in size by 2014years. This should also translate into superior profit margins for players 15. Thu s,stronger even as multitude of brands already dot the segments that are in a the premium segment. landscape and more are expected to follow, the likely expansion in the pie should offer sufficient volumes for the industry to grow profitably. For the Market Share Trends new entrants, a faster gain in market share could hasten the process of The Indian motorcycles segment continues to be dominated by Hero profitability improvement. MotoCorp (erstwhile Hero Honda) which has been recording sequential gains in market share over the last three quarters. The top three players accounted for 88.2% of the industrys volumes in Q1, 2011-12 (92.0% in FINANCIAL PERFORMANCE OF TWO-WHEELER OEMs 2007-08), with Honda Motorcycles having overtaken TVS since Q1, 2010-11 as the third largest player after Hero MotoCorp and Bajaj Auto.

million units (Nos.)

Source: SIAM, ICRAs Estimates

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FINANCIAL PERFORMANCE OF TWO-WHEELER OEMs Hero MotoCorp

Chart 5: Trend in Financial Performance of Hero MotoCorp
7,000 6,000 5,000 18% 16% 14% 12%

Bajaj Auto
Chart 6: Trend in Financial Performance of Bajaj Auto
6,000 5,000 4,000 35% 30% 25% 20% 3,000 15% 2,000 1,000 10% 5%

4,000

10% 8% 6% 4%

3,000
2,000 1,000 0

2% 0%

Rs. Crore

Rs. Crore

0%

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Revenues

OPM

PAT Margins

Revenues

OPM

PAT Margins

Revenues: In Q3, 2011-12, Hero MotoCorps revenues at Rs. 5,983.6 Crore grew by 16.9% YoY and 3.4% QoQ, supported by 11.3% YoY and 2.9% QoQ increase in sales volumes and 5.0% YoY and 0.5% QoQ increase in average realizations. Till 2010-11, exports accounted for 2.5% of the companys sales volumes. Although since the time Hero MotoCorps JV agreement with its erstwhile partner Honda (Japan) ceded in Dec 2010, the company has been unable to scale up its exports much; it is likely to get more aggressive on the exports front as and when its fourth manufacturing plant gets established (for which the company is mulling a location near one of the ports). Operating Profit Margins (OPM): Hero MotoCorps OPM at 15.0% in Q3, 2011-12, declined marginally by 15 basis points (bps) QoQ but increased by 454 bps YoY. The YoY expansion in HMCLs core EBITDA margins, however, was relatively lower at 194 bps YoY on exclusion of the estimated royalty payments made by HMCL to its erstwhile partner Honda Motor Company (HMC, Japan) in Q3, 2010-11. Going forward, HMCLs ability to sustain the scale required to absorb the additional expenses being incurred for creating a new corporate brand, introduction of new models, building of R&D capability and exploring overseas markets will govern its profitability. Net Profits: Hero MotoCorps Q3, 2011-12 PAT at Rs. 613.0 Crore grew by 42.9% YoY and 1.6% QoQ. Overall, the companys revenues and PAT touched a record high in Q3, 2011-12.
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Revenues: In Q3, 2011-12, Bajaj Autos revenues at Rs. 5,063.2 Crore grew by 21.2% YoY but declined by 3.9% QoQ) led by continued strong exports growth in both the 2W as well the three-wheeler (3W) segments; increase in average realization due to both price increase as well as favourable change in product mix; and favourable currency movement on exports. The company managements outlook on exports (~32% of 2W volumes in Q3, 2011-12) remains robust with a target to achieve export of 1.5 million units in 2011-12E, reflecting a growth of 25% over 2010-11. Operating Profit Margins (OPM): Bajaj Autos OPM improved to 21.0% in Q3, 2011-12, higher by 63 bps YoY and 89 bps QoQ. The improvement in margins was supported by relatively higher realizations from exports, operating leverage benefits and rationalization of spends on sales promotion. The DEPB benefits were discontinued post September 2011; however, BAL has undertaken price increase on export models (besides price increase on domestic models), which should allow the company to sustain its margins going forward. Net Profits: In Q3, 2011-12, while Bajaj Autos OPBITDA growth at 25.0% (YoY) was robust, the companys PAT at Rs. 795.2 Crore grew at a relatively lower rate of 19.2% (YoY). This was due to the exceptional MTM loss of Rs. 58.9 Crore recorded by the company in Q3, 2011-12 related to the valuation of forward exchange contracts. This is a notional loss and would get reversed on maturity of the underlying contracts (assuming the companys actual exports remain in line with its budgeted estimates during the term of the contract).

Q3 FY12

FINANCIAL PERFORMANCE OF TWO-WHEELER OEMs TVS Motor

Chart 7: Trend in Financial Performance of TVS
2,500 8% 7% 2,000 6% 5% 4% 1,000

Rs. Crore

1,500

3% 2%
1%

Revenues: In Q3, 2011-12, TVS Net Sales at Rs. 1,762.2 Crore grew by 7.0% YoY but declined by 11.5% QoQ. While the companys total 2W volumes in Q3, 2011-12 grew by 0.9% YoY and total three-wheeler (3W) volumes declined by 11.0% YoY, the revenue growth was much higher by virtue of favourable change in product mix. Thus, notwithstanding the increase in proportion of low-ticket mopeds in TVSs domestic 2W sales volumes from 39% in Q3, 2010-11 to 41% in Q3, 2011-12, the increase in proportion of >100cc scooter (Wego) and >125cc motorcycles (mainly Apache RTR family) in its sales mix enabled it to improve its average realization YoY. Operating Profit Margins (OPM): TVS OPM at 6.5% in Q3, 2011-12 was 44 bps higher YoY but 40 bps lower QoQ. While the companys product mix in Q3, 2011-12 was in its favour on YoY basis, its relative deterioration on QoQ basis accordingly translated into movement in OPM. Net Profits: While TVS recorded OPBITDA growth of 14.6% YoY in Q3, 2011-12, the companys PAT growth at 1.4% YoY was much lower on account of higher tax rate and lower other income. Also, the companys PAT in Q3, 2011-12 declined by 26.1% on QoQ basis both due to negative revenue growth (QoQ) as well as decline in OPM on QoQ basis.

500

0
Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12
Q4 FY10 Q1 FY11

0%

Revenues

OPM

PAT Margins

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Analyst Contacts
Analysts Contacts subrata@icraindia.com kinjal.shah@icraindia.com anupama@icraindia.com shamsherd@icraindia.com jitinm@icraindia.com pavethrap@icraindia.com 022 3047 0027 022 3047 0027 0124 4545303 0124 4545328 0124 4545368 044 45964314

Mumbai
Subrata Ray Kinjal Shah

Delhi
Anupama Arora Shamsher Dewan Jitin Makkar

Chennai
Pavethra Ponniah

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